Consumer spending even performed better than expected in July as inflation pressures showed further signs of easing, the Commerce Department reported Thursday.
Retail sales in the previous month rose 1% from the previous month, according to figures that are seasonally adjusted but do not take inflation into account. Economists surveyed by Dow Jones had expected a 0.3% increase. Sales for June were revised to a 0.2% decline after initially being reported as unchanged.
Excluding automotive-related items, sales rose 0.4 percent, also above the forecast of 0.1 percent.
There was also good news from the labor market: In the week ending August 10, a total of 227,000 initial applications for unemployment benefits were filed, 7,000 fewer than in the previous week and less than the estimate of 235,000.
Sales increases were driven by increases at auto and parts dealers (3.6%), electronics and appliance stores (1.6%) and food and beverage stores (0.9%). Other retail trade declined 2.5%, while revenue at gas stations rose just 0.1% and clothing stores fell 0.1%.
Stock market futures rose sharply following the release of the data on Thursday morning, while U.S. Treasury yields also soared.
“Once again, this was proof that the U.S. consumer is still capable of surprising on the upside,” wrote Richard de Chazal, macro analyst at William Blair. “This was another solid report and inconsistent with a consumer on the verge of collapse.”
The report comes in the same week as data showing that inflation eased slightly in July.
The prices consumers pay for goods and services rose 0.2% month-on-month, and the annual inflation rate fell to 2.9%, the lowest since March 2021. At the same time, wholesale prices rose only 0.1% month-on-month and 2.2% year-on-year.
Although inflation figures remain above the Federal Reserve's two percent target, the data suggest that price pressures, which peaked two years ago, are continuing to ease.
A counterargument to this came in another data release on Thursday, in which the Labor Department said import prices rose 0.1% in July, slightly above the unchanged forecast. Year-on-year, import prices rose 1.6%, the largest increase since December 2022.
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Financial markets expect the Fed to respond with the first rate cut in more than four years at its next meeting in September. However, robust consumer sentiment could give policymakers another reason to take a more dovish approach to rate cuts.
To address the issue of the stable consumer, Walmart The company had previously reported strong earnings and revenue for the previous quarter on Thursday and raised its outlook, but also made some cautionary notes about the second half of 2024.
In addition to expectations of lower interest rates, investors also increasingly expect the Fed to shift its focus from just inflation to a broader view of potentially weakening conditions in the labor market and elsewhere.
The Labor Department's jobless claims figures also showed that continuing claims, which are one week behind, fell slightly to 1.864 million. A weaker-than-expected July payrolls report had raised fears that the labor market could be weakening.
Further economic data released on Thursday showed that the situation in the manufacturing sector is faltering.
The New York Fed's Empire State Manufacturing Index rose slightly, but was still in negative territory at -4.7, slightly better than the estimate of -6. At the same time, the Philadelphia Fed Manufacturing Index slipped to -7, the first negative reading since January and well below the forecast of 7.9.
Both indices measure the percentage of companies reporting expansion rather than contraction.
In other economic news Thursday, the Fed reported that industrial production fell 0.6 percent in July, worse than the forecast for a -0.1 percent decline, as Hurricane Beryl reduced the total by 0.3 percentage points. Capacity utilization also fell, coming in at 77.8 percent, below the forecast for 78.5 percent.
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